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Protection Review: Hybrid life and care protection insurance plans

A new era for protection?

Kevin Carr, chief executive of Protection Reviewhighlights the recent launch of a new kind of insurance product and wonders whether it represents the start of a new era for protection

The launch of a new hybrid life and care protection insurance plan could be the start of a new era for protection and long-term care insurance.  As well as the offering from the newly named Vitality Life – formerly PruProtect – other protection providers including Ageas Protect and Zurich have also indicated plans to launch similar cover too.

The move follows government encouragement of insurers to develop new solutions to help fund care, especially for older people, and the new products work by building an add-on option to a conventional whole of life or term insurance policy. Under the Vitality Life model, part or all of the sum insured is paid out early if the customer (the life insured) is diagnosed with a qualifying condition or fails a number of activities.

"It is precisely because of the myriad protection products and options on offer that advice becomes so valuable."

Have we not been here before? 

An ageing society may mean the need for long-term care insurance has never been higher – although insurers remain cautious, not least because many lost money when long-term care was previously launched with much noise in the early 1990s. 

Back then, insurers quickly faced a number of problems. Average premiums for pre-funded regular premium plans were more than double the average for income protection plans – the nearest equivalent protection plan, paying out a monthly income if a pre-retired person was unable to work because of illness or disability – and many people decided pre-funded cover was simply too expensive.

So products were bought mainly by people in retirement and had to be funded from (lower) retirement income or capital. Few younger people saw the need or were persuaded to buy the plans, so the average customer age was usually late 60s or early 70s.

Furthermore, many products were investment-linked and reviewable, and relied on overoptimistic growth rates to work. When that growth failed to appear, subsequent product reviews led to unexpected sharp rises in premiums or benefit cuts. 

Claims were also much higher than anticipated. Partly, that was because people going into care now did so with few or no financial concerns. As a result they tended to live longer. With average life expectancy measured in months for many, any increase could have a dramatic effect on profitability. Anti-selection was an issue too.

The regulation imposed at the time ratcheted up and placed a high qualification hurdle in front of advisers. Many decided it was not worth trying to obtain such qualifications for the small amount of business they would write. State help for long-term care was often considered hard to decipher too.

Are the new products different?

The new breed of plans look to be radically different from those we saw in the 1990s. Taking the first product to market as an example, the benefit is a lump sum – based more on the more successful critical/serious illness insurance model than on the much slower-selling income protection model.

That idea is not new of course. Critical illness-style benefits were also offered 20 years ago, but they too failed to achieve much sales success at the time. Benefits are tiered, with a lower level payment for one type of claim, and the full sum insured on another. If a care benefit is paid out, the balance is then paid on death during the policy’s term. 

The case for today’s plans paying a lump sum rather than income is that, from 2016, new government rules will provide caps on long-term care costs. However, research by Partnership published last November suggests people could have to spend significantly over the £72,000 cap for their long-term care costs and, in any event, will be expected to pay around £12,000 a year themselves to cover so-called ‘hotel’ costs.

Vitality Life has also looked at what should constitute a claim – for example, unlike the 1990s plans, it specifies conditions such as Alzheimer’s and Parkinson’s and also has an overarching definition of ‘Persistent Confusional State’. It also pays claims on severe stroke resulting in permanent symptoms.

How well might these new plans meet customer needs?

The US long-term care market is more substantial than the UK’s and, according to the American Association of Long-Term Care Insurance the top 10 reasons people need long-term care include fractured bones (commonly resulting from a fall), recovering from an illness, injury or surgery, rehabilitation following a hospital stay, Alzheimer’s disease and dementia, multiple sclerosis, Parkinson’s disease, heart disease, stroke and obesity.

According to the association’s director Jesse Slome: “The majority of claims are for care in the policyholder’s own home or in an assisted living community.” The association has also identified that around 40% of new claims were initially attributable to Alzheimer’s with other leading claims heads being stroke (9%), arthritis (9%), injury (9%), circulatory problems (9%), cancer (8%), nervous system (6%) and respiratory issues (5%).

If UK experience turns out to be similar, the new plans look to cover many of these needs. “There is no doubt more clients are beginning to ask questions relating to long-term care as they want to know more about providing a degree of protection beyond their intended retirement age,” say Roy McLoughlin of Master Adviser. “These new products seem to being going in the right direction of bridging this gap, which is only likely to become a larger market in the future.”

Will other insurers enter the market?

It has been reported that both Ageas Protect and Zurich will launch whole of life plans with a similar long-term care component early this year and one might expect others to follow suit. With diseases being diagnosed more quickly and less advanced cases of illnesses such as cancer becoming commonplace – have you seen the adverts lately saying for the first time ever more than half of people diagnosed with cancer are surviving the disease? – insurers are recognising the industry has paid too much attention to covering people during their working life; concentrating on those with mortgages and dependent families, despite the demographic changes that continue to alter the needs of the population.

At present around 10% of the country are aged over 75, meaning there is one for every eight men and women in the working population. By 2035 this is projected to reach 15%, or a ratio of 1:6. In later life, degenerative diseases such as dementia present a rising risk – it became the leading cause of death in women in England and Wales in 2013 – and approximately 60% of over-65s will require care at some point. Incidence of dementia is expected to increase 2.5 times over the next 35 years.

With more of us living longer into old age and a far greater number of people needing care at some stage, the financial burden on the state and the individual is becoming intolerable and we now see examples of people unable to afford the standard of care their elderly loved ones deserve, having already been forced to sacrifice their life savings, property and any other assets they had accrued over their life and hoped to pass onto their descendants.

Put simply, these products will sit somewhere in between critical illness cover and long-term care. They will provide life cover via a traditional whole of life contract with benefits also payable upon diagnosis of, for example, Alzheimer’s, Parkinson’s or dementia.

“I like the thinking behind these products,” comments Peter Chadborn of Plan Money. “Not all innovation is good innovation but the market seems to be joining the dots between protection and long-term care, which most advisers will welcome.”

Sometimes advisers wonder why there are so many different types of protection product and many would like it all to be so much simpler. But there are two truths to remember. The first is that illness itself is not simple and, to an extent therefore, the insurance supporting it can rarely be that simple either. 

Second, if it was all so simple why would people need advice? That is not to suggest the industry creates complicated products in order to confuse people – oh, the irony – but rather to say that it is precisely because of the myriad protection products and options on offer that advice becomes so valuable.

Kevin Carr is chief executive of Protection Review and managing director of Carr Consulting and Communications

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